Rebuilding the Social Contract at Work: Lessons from Leading Cases

Thomas A. Kochan Institute for Work and Employment Research Sloan School of Management, MIT

Task Force Working Paper #WP09

May 1, 1999

Draft in Circulation

Saturn

The Saturn Corporation is a wholly-owned subsidiary of General Motors that manufactures and sells small cars. From its initial planning process, conducted in 1983 by a "Committee of 99" consisting of GM and UAW representatives, Saturn was conceived of as a full partnership between
the union and the company. The decision to create Saturn was motivated by company and union desire to build and sell a small model in the United States that would compete well against imports and to create jobs for UAW members. The decision to create an entirely new company at a greenfield site was
made after management concluded that GM could not competitively manufacture a small car in the U.S. under the existing labor contract and management policies.

Several key events have shaped the GM-UAW labor-management experiment taking place at Saturn: equal partnership between union and management in the design of the organization; the emergence of co-management; the importance of performance and image; the introduction of
conflicts and controversies about Saturns future within the union and GM after its original champions retired; and concerns over Saturns long-term viability as expressed during 1998 contract negotiations.

The Committee of 99 developed an organizational design that makes the UAW an institutional "partner," participating in consensus-based decision-making from the shop floor to the levels of senior management. This structure is overseen by a series of decision rings at
the department, plant or business unit, manufacturing policy, and strategic policy levels of the organization. Through the partnerships arrangements, the UAW becomes an important part of strategic decisions made regarding supplier and retailer selection, choice of technology, and product
development. An initial 28-page collective bargaining agreement outlines the basic principles governing the relationship and the team-based system of work organization.

The partnership process is complemented by employment practices designed to ensure that employees have the knowledge, skills, and motivation to contribute to the performance of the enterprise. Saturn requires all employees to take a minimum of 92 hours of training each year. In
1995, 20 percent of compensation at Saturn was contingent on the completion of this minimal amount. In addition, more than 80 percent of the workforce is guaranteed employment security for life. Work organization at Saturn is based on self-directed work teams of 10 to15 members, who are
cross-trained and rotate responsibility across the tasks in their unit. Teams have collective responsibility for hiring new members and electing their own team leaders. The next level of organization, called modules, cover an average of five to seven teams and conduct weekly governance meetings in
which teams are represented by their leaders. Teams also have responsibility for quality assurance, job assignments, record keeping, safety and health, material and inventory control, training, supplies, and housekeeping.

As the organization took shape, local union officials and management added another unique feature. At the department or module level, management responsibilities became shared by two "module advisors," who are partnered. Each "partnership" at the department level consists of union
module advisors who are partnered with non-represented management module advisors. This feature of the partnership makes Saturn the boldest experiment in co-management found in the U.S. today.

Until 1994, jointly-selected UAW crew coordinators maintained responsibility, along with their non-represented partners, for managing crews across several departments, which is the responsibility of superintendents in GM's more traditional plants. However, in 1994as a result
of a negotiated agreement and in response to considerable pressure from rank and file workersthe 14 UAW crew coordinators became elected officials with the authority to file grievances.

Saturn uses as its marketing slogan and logo the following phrase: "A Different Kind of Company. A Different Kind of Car." Thus, it builds on its partnership with the UAW and several other distinctive features of the companys practicessuch as its fixed price,
no-haggle, retail sales and service strategyin positioning the company and its products in the minds of consumers. To date, this approach has been very well-received by the market. According to the J.D. Power Customer Satisfaction Index, within two years of its first production run in 1990
and in every year since, Saturn achieved higher ratings in initial vehicle quality, in satisfaction after one year of ownership, and in service than any car in its class. Only Lexus and Infiniti, two upscale models costing three times as much as Saturn, received higher customer satisfaction
ratings.

Saturn's productivity and profitability, however, are not as high as its quality ratings. Yet, its productivity levels still remain near the top of those at GMs other plants. In evaluating profitability, a question arises: Should Saturn amortize this investment alone, or
should the rest of GMs enterprisewhich was supposed to learn from this experimentshare in their costs? Regardless, Saturn generated its first operating profit in 1993 after mobilizing its third crew and being pressured by its GM parent to cut costs and move up the date targeted
for achieving a profit. Bonuses based on financial, productivity, and quality goals have been paid to Saturn employees each year since 1993. The 1995 and 1996 bonuses totaled $10,000 for each member, which is the maximum allowable under the contract. Bonuses declined in 1997 and 1998, as
Saturns sales declined.

Despite its successes, Saturn is a controversial topic within both the UAW International Union and GM. Several years after Saturn was created, its original champions within both the UAW and GM retired. Their successors were not as committed to Saturns principles and
partnership structure. Meanwhile, over the course of the 1990s, GM and the UAW experienced an intermittent set of strikes, largely over questions about outsourcing. These conflicts peaked during a seven-week strike in the summer of 1998, which shut down nearly all of GMs production
operations. At the end of this strike, both GM and UAW leaders pledged to find a better way of dealing with these issuesyet what, exactly, this promise means remains uncertain. GM continues to feel intense pressure to outsource more of its component production to outside vendors. In fact, it
announced shortly after the end of the strike its intention to group component operations into a separate division (Delphi), as well as to continue exploring options for divesting component operations that are not competitive with outside alternatives.

UAW leadership and the leaders of the Saturn local have been experiencing considerable internal conflict over the past decade on a host of issues ranging from the adequacy of representation on traditional issues to shift schedules, overtime and shift premiums, and other
administrative matters. Political factions have also arisen within the local (similar to the dynamics at other UAW local unions). For example, each election of union officers since 1992 has been hotly contested.

GM management has also been ambivalent about Saturn. On the one hand, the corporation relishes the positive image that Saturn has achieved and urges other divisions to learn from Saturn's experiences. On the other hand, while some technical and marketing innovations have been
adopted, there is little evidence that significant learning from or diffusion of Saturns organizational principles has occurred within GM. Moreover, in 1996 GM decided to accede to the International UAWs preference to build the second generation Saturn model in GMs Wilmington,
Delaware plantnot in Spring Hill, as requested by the local union and management. The labor agreement negotiated at Wilmington calls for some use of teams and employee involvement, but does not include the full partnership model found in Spring Hill; it remains a part of the national UAW-GM
contract.

In 1998, GM announced that Saturns engineering, design, and parts sourcing decisions would be integrated into the GM small car division as part of its overall re-centralization of these functions.

Finally, Saturn has somewhat of a schizophrenic identity. On the one hand, it receives many accolades for innovative organizational design and employee relations, as well as for favorable customer satisfaction performance. On the other hand, many of the provisions of the
partnership are of questionable legality under American labor and employment laws; the co-management and shared governance structures have been criticized by some business leaders as rescinding important managerial prerogatives; and some union leaders are critical of the many long-standing work
rules that the union abandoned in return for this type role in the governance and management process.

Concerns over these developments came to a head in Spring Hill in 1998. In April of that year, the unionin response to rank and file concerns over the long-term viability of Saturnheld a referendum over whether to continue the partnership as specified under the local
agreement or to return to the national contract. Sixty-eight percent of the membership voted in favor of continuing the partnership as specified in the Saturn agreement. Then, in the summer of 1998, the union took a strike authorization vote and issued a 30-day strike letter in an effort to resolve
an ongoing dispute over both the formula for the risk-reward plan and the broader issue of the future product stream planned for Spring Hill. These negotiations produced an agreement that included the following provisions: GM would build a Saturn Sport Utility Vehicle at Spring Hill; the union
would be included in the sourcing decisions affecting Saturn products; moreover, four factors (cost, quality, brand image, and job security) would be considered in making sourcing decisions; and a compromise resolution to the parties different interpretations of the risk-reward formula would
be enacted.

These negotiations served to force a decision on Saturns future, which had been either delayed or allowed to drift for several years. GM was forced to decide how Saturn would fit into its larger centralization effort, as well as its common engineering, purchasing, and
platform strategies and structural realignment. It also had to choose whichif anyfuture products would be produced at Spring Hill. The result was that GM stated its continuing commitment to the Saturn Partnership and reinforced this commitment by agreeing to build the Sport Utility
Vehicle in Spring Hill, as well as to give the union a voice in sourcing decisions. Yet, despite these major compromises and commitments, GM continues to follow its recentralization and outsourcing strategies. GMs strategy remains rather ambivalenttrying to accommodate the principles of
the Saturn partnership while simultaneously integrating Saturn into the corporation.

The negotiations involved considerable use of traditional bargaining tactics by the union, including severe criticism of the commitment and competence of Saturns senior management. A strike vote was held, the pace of production slowed, union leaders went around Saturn
management to pressure GM executives, and the union used the leverage created by bad publicity. These strategies, in turn, irritated Saturn management officials and fostered bad feelings.

In a recent paper, Saul Rubinstein and I (Kochan and Rubinstein 1998) argue that Saturn represents not only the most comprehensive labor-management partnership model found in the U.S. but also an organization that embodies many of the principles of what is meant by a
stakeholder corporation:

Saturn was designed to achieve both GMs shareholders goal of making a small car profitably and the workforce and unions goal of building small cars in the U.S. with U.S. workers and UAW members; this fact implies that the success of the firm should be measured against
these multiple objectives.

Workers and union representatives were to be full and legitimate partners in the governance and management processes of the firm, and

Workers share the risks and rewards of the firms performance with shareholders.

Thus, more than any other U.S. case, Saturn illustrates a type of organizational partnership and employment system that can be created when a union with a vision of its own participates in the design, governance, and management of the enterprise. Workers have a strong voice on
both traditional labor-management and broader managerial or strategic issues. Principles of teamwork, continuous improvement, quality, safety, ergonomics, and customer satisfaction are given high priorities. Conflicts occur both within and across traditional labor and management boundaries, but are
managed and resolved differently than through the reliance on traditional contract negotiations or grievance arbitration processes.

Whether Saturns limited profitability to date implies that this organizational model inevitably redistributes some of the financial rewards across the different stakeholders at the expense of shareholders is still an open questionone that is likely to be the subject of
considerable debate in the future. Thus, despite the positive publicity that the UAW-Saturn partnership has received and its success on the quality and marketing fronts, the ambivalent support from both parents (UAW International and GM), leave the future of Saturn somewhat uncertain.

At the same time, GM and the UAW both realize that the traditional approaches they have taken to their relationship in general have not addressed the underlying competitiveness and job security challenges they face. Both parties are examining future options. Whether any of the
principles, practices, and lessons from a decade of Saturn experience will be brought to bear on this larger relationship remains to be seen.

Over the past several yearsand particularly over the past yearthe parties have been caught in a downward, reinforcing spiral. The union was frustrated with a lack of leadership and decision-making power within Saturn management and the lack of support from UAW national
leaders. Its renewed militancy has left some managers feeling they have been betrayed. At the workplace, the partnership was put on hold. Workers, in turn, became demoralized, as they saw sales and production fall; as the relationship deteriorated, they began falling into traditional patterns.
Therefore, performance declined, adding further to costs and the frustration of management.

GM agreed to a settlement that is inconsistent with its larger strategy of centralizing design, purchasing, and outsourcing components. It gave the union a role in purchasing/sourcing decisions, using the criteria of cost, quality, brand equity (image), and job security. They did
so in this instance because the UAW threatened a strike that would have imposed big economic and public relations costs on the companyand might have signaled the death of the partnership principles. How the new arrangement will be implemented and made to work in the context of GMs
broader centralization and outsourcing decisions remains to be seen.

Saturn represents the most far-reaching example of a labor management partnership model, one that embodies more of the features of a stakeholder model of the corporation than any other example discussed here. As such, it suggests both some strengths and limitations.

On the one hand, it shows that multiple objectives of firms and employees can be achieved and balanced if both labor and employer representatives share a commitment to building and sustaining a partnershipthat is, a legacy of mutual commitment fostered by the first
generation of leaders who built Saturn. Second, it demonstrates that this type of employment relationship and the commitment to quality and customer service resonates positively with consumers and has a positive market value.

But the case also illustrates the significant resistance that exists to sharing power fully and redefining the basic mission, goals, and governance structures of the American corporationand, therefore, the difficulty Saturn has experienced in sustaining support from leaders
both within its parent labor and corporate organizations. It also suggests that significant changes in labor and employment laws, as well as perhaps in corporate law, would be needed to allow this full type of stakeholder firm to emerge and survive in the United States.

A further limitation of the Saturn model is the fact thatlike the other examples discussed herenon-represented managers and professionals were not formally included in the governance process. How to treat these employees remains an open question.